Inequality in income and consumption

My hypothesis is that while inequality in terms of income or wealth (measured in rupees/dollars) has been growing, consumption inequality is actually coming down. I hope to do a more detailed analysis using data, but I’ll stick to an anecdote for this this introductory blogpost.

The trigger for this thought came about a year back, at a meeting in one of the organisations I’m associated with. The meeting wasn’t terribly interesting, so I spent time checking out the guy sitting next to me, whose Net Worth I knew is at least a couple of orders of magnitude more than mine.

He was wearing a Louis Philippe shirt, and I have several shirts of that brand. He had a Parker pen, and I use a Parker too. He had a rather fancy watch whose brand I do not recall now, but my Seiko isn’t that bad in comparison. And he had an iPhone, which cost four times as much as the phone I used then (a Moto G), but not out of reach for me.

I can go on but the gist is that while our income and wealth levels were different by an order of magnitude, our consumption wasn’t all that far off. I must admit that I’m also a so-called “1-percenter” in terms of income (recall a study which said that 99th percentile of income in India is Rs. 12 lakh per annum), so I was also part of the power law tail, yet the marginal difference in consumption to income levels was strikingly low.

Since this is an introductory blog post on this topic, I posit that this is a more general trend and applies at many other levels. The thing with inequality is that income (and wealth) is usually distributed according to a Power Law (unless the state is extremely coercive and extractive), so as the economy grows, inequality as measured by measures such as the Gini coefficient is bound to increase (here’s a nice but hard-to-read paper by Nassim Nicholas Taleb on why the Gini coefficient is flawed for fat-tailed distributions such as the power law).

Yet, as the economy grows, more people are pushed beyond a “basic level” of income where they are able to afford “necessities” (and certain kinds of luxuries), so inequality as measured by consumption will actually be lower. The challenge is in measuring such inequality appropriately.

I’ll mention a couple of more anecdotes in support of this. One sector where inequality has fallen is in commute. Some rich old-time Bangaloreans look back in nostalgia at a time when there was no congestion on the streets of Bangalore, and how the city has since deteriorated. Yet, that congestion-free travel was then available only to the extremely wealthy (who could afford private vehicles) or lucky (my father waited for four years to get his first scooter because of limited supply). Public transport infrastructure was abysmal and buses infrequent.

Now, a larger proportion of the population can afford private vehicles and public transport has also improved (though not by much), making life better at the lower end of income/wealth levels. And the rich (who had exclusive access to roads in private cars earlier) are faced with higher congestion.

Another obvious example is the telephone. Very few people had them even twenty years back (we applied for ours in 1989, only to get “allotted” a phone in 1995), and now pretty much everyone has a basic mobile phone now (and with cheaper smart phones, even some relatively poor people own smart phones).

This is a theory worth pursuing. Need to analyse how to collect data and measure inequality, but I think there’s something to this hypothesis. Any thoughts will be welcome!

The Global Financial Crisis Revisited

When we talk about the global financial crisis, one question that pops up in lots of people’s heads is about where the money went. Since every trade involves two parties, it is argued that every loser has a corresponding winner, and that most commentary about the global financial crisis (of 2008) doesn’t talk about these winners. Everyone knows about the havoc that the crisis caused when prices went down (rather suddenly). The havoc that the crisis caused when prices initially went up (rather slowly) is less well documented.

The reason winners don’t get too much footage is that firstly, they are widely distributed, and secondly they spent away all their money. Think about a stock or a CDO or a bond being a like a parcel that you play by passing the parcel. The only thing is that every time you receive the parcel, you make a payment, and then pass on the parcel after receiving a higher payment. Finally, when the whistle blows, one person has the parcel in his hand, and it explodes in his face, ruining him. We know enough about people like this. A large number of banks lost a lot of money holding parcels when the whistle blew. Some went bust, while others had to be bailed out by governments. We know enough of this story so I don’t need to repeat here.

What is interesting is about the winners. Every person who held the parcel for a small amount of time was a winner, albeit a small winner. There were several such winners, each of whom “won” a small amount of money, and spent it (remember that the asset bubble in the early noughties was responsible for increasing consumption among common people). This spending increased demand for various goods and services produced in several countries. This increasing demand led to greater investment in the production facilities of these goods and services. Apart from that, they also increased expectations of growth in demand of these goods.

The damage the crisis did on the way up was to skew expectations of growth in different sectors, thus skewing investment (both in terms of financial and human capital). The spending caused by “small wins” for consumers put in place unreasonable expectations, and by the time it was known that this increased demand came as a result of an asset bubble, a lot of capital had been committed. And this would create imbalances in the “real economy”.

Yes, the asset bubble of the last decade did produce winners. The winners begat more winners (people whose goods and services were bought). However the skewed expectations that the wins created were to cause damage in the longer term. Unfortunately, I don’t see this story being told adequately, when the financial crisis is being talked about. After all, the losers are more spectacular.

Urban living and restaurants and liquidity

Last night I had dinner at Alfanoose, a small Mediterranean joint off Broadway. I had hummus and salad with pita bread, and had also brought along a falafel sandwich which is now sitting in my fridge and is likely to get consumed today for breakfast. Excellent stuff. Absolutely brilliant. And not expensive at all – ten bucks for the hummus and salad, and six for the sandwich. Considering that USD = 10 INR according to the Idli index, this is extremely reasonable, insane value for money.

I have been intending to write this post for ages, about how one of the best positive externalities of urban living is restaurants. When you are living in a desolate area, with not too many people around, there is no option but to cook your own food. Even if you live in a village ora small town, the number of people who are willing to eat out will be small, which means it makes little business sense for someone to open a restaurant there. You are likely to find a handful of them, but the lack of competition will mean that you can’t really trust quality.

There is a network effect in restaurants. Some people don’t eat anywhere but at home, and some don’t cook at home at all. However, there is the large middle ground of people whose consumption of restaurant food varies directly with quality and liquidity. And these two concepts are inter-related – the bigger the town is, the greater the required supply of restaurants which means more competition and thus higher quality. And higher quality leads to higher demand (more fence-sitters converted) and the virtuous cycle goes on (of course, population and the fact that some people don’t like to eat out limits the boundaries of the cycle).

Another thing is that the larger a town gets, the greater the liquidity of the food market in there, there is more variety. If you remember Bangalore in the 1980s, when I was growing up, there was one standard type of restaurant. Where you would get cheap idli and dosa and a few other standard snacks, and a few “north indian” items at meal times, and every time you wanted to eat out you had to go with one of these. And you would have noticed how with the growth in the restaurant market in the 90s you got more variety.

What makes cities such as London and New York such foodie havens is their size, and also that culturally people here are more inclined towards eating out than in other places such as India. This leads to insane liquidity in the market, and as I explained above that leads to more variety, and so you get more niche food. And when you have cities as large as New York or London, what you get is full-fledged liquid markets in cuisines that are everywhere else considered niche!

So because of liquidity in otherwise niche markets, in each cuisine you will find various kinds of restaurants. Like yesterday I had awesome hummus at this self-service place! While in a place like Bangalore to get any kind of hummus you’ll have to go to a fine dining place and spend a bomb.

Another thing I realized is that when liquidity is thin it usually occupies the top end – like how in Bangalore you get non-Indian stuff only in high end fine dining places. But I suppose I’ll write about that in detail some other day